Telefonica Sees Mexican Growth in Markets Where Slim Isn’t

Sept. 27 (Bloomberg) -- Telefonica SA, which has struggled
to compete in Mexico against Carlos Slim, is seeking to boost
sales in Latin America’s second-largest economy by identifying
markets the billionaire has missed.

Expansion will come from smaller businesses and cities that
have been under-served by Mexico’s wireless industry, said Juan
Abellan, chief executive officer of the Madrid-based company’s
local unit. While a regulatory reduction in fees pushed Mexican
sales down 4 percent to 776 million euros ($999 million) in the
first half of 2012, the changes Telefonica is making will help
return the unit to growth, Abellan said yesterday in an
interview in Mexico City.

Telefonica is investing in Mexico even as it sheds other
assets, including stakes in its German and Latin American
businesses, to help cut its debt of more than 58 billion euros.
While it only has 20 percent of the Mexican wireless market
after a decade of operations, compared with 71 percent for
Slim’s America Movil SAB, Telefonica considers the country a key
market, Abellan said.

“We know this path is the right one,” he said. “Our
commitment is to Mexico, without question.”

Last year, Mexico’s government cut by more than half the
fees that wireless carriers get to connect calls to their users,
crimping Telefonica’s profit. The carrier’s operating profit
margin in the country, leaving out depreciation and
amortization, fell to 23.9 percent in the first half of 2012
from 26.8 percent a year earlier.

Venturing Outside

Telefonica is adding employees in Mexican cities with
populations of about 1 million, venturing outside the nation’s
three largest metropolitan areas, Mexico City, Guadalajara and
Monterrey. In many of the smaller cities, only 50 percent to 60
percent of people have mobile-phone subscriptions, Abellan said.

Small companies, including sole proprietorships and
businesses with five to 250 employees, have a similar lack of
services in Mexico compared with multinational corporations,
presenting an opportunity for Telefonica, he said.

Telefonica has 7 billion pesos ($544 million) budgeted for
Mexican investments this year, while America Movil, which has
wireless and land-line networks in the country, said in March it
would spend 32.5 billion pesos on network improvements.

‘Market Dominance’

“Even if this move could bring some growth for Telefonica
in Mexico, it’s going to be very difficult to see any meaningful
impact on the parent company in the short term,” said Pedro
Oliveira, an analyst at Banco BPI in Porto, Portugal. “It’s
difficult to see that happening, without some regulatory changes
in order to reduce America Movil market dominance.”

While Telefonica hasn’t completed its full budget for 2013,
it will spend a total of 3.12 billion pesos this year and next
to build speedier networks, Abellan said. A network using long-term evolution technology, or LTE, is already available in parts
of Mexico’s three biggest cities, he said.

Telefonica also announced a wireless plan yesterday that
gives users unlimited access to social networks such as Facebook
Inc. and Twitter Inc. when they pay at least 200 pesos a month
for voice calls.

Telefonica shares gained 0.1 percent to 10.72 euros in
Madrid today. The stock has dropped 19.9 percent this year,
which compares with the 8.5 percent decline by the benchmark
IBEX 35 Index.